Cyber risks are among the most pervasive risks of our time.
They impact all industries that purchase insurance, and all lines of insurance. A panel from the insurance community whose roles in their companies focus on cyber risks (some from the underwriting and product development perspective, and others from the claims handling perspective) discuss key issues and challenges that insurers face from cyber risks.
Eric Cernak – Munich Re US – Cyber and Privacy Practice Leader
Kirstin Simonson – Travelers – Cyber Lead for Global Technology
Karrieann Couture – CNA Specialty Claims – overseeing technology, cyber, and fidelity claims operations
Laurie Kamaiko – Sedgwick LLP – Cybersecurity & Practice Group Leadership Team and Co-Chair Cyber Insurance Task Force
Q: What constitutes a "cyber risk," and what is the range of cyber risks that insurers and their policyholders are dealing with these days?
Simonson: In the early days, we were focused on whether general liability insurance would respond to cybersquatting or other intellectual property issues. Around 2003, all of that changed when states started enacting breach notification laws requiring notice to individuals when the security of their personal information held by companies was breached and that information was stolen or lost; that was the driver behind a lot of the cyber coverages. Today, there are now really two buckets of risks in play: The first is the data privacy bucket, which involves the privacy of personal information and the protection of confidential information of others that a company holds within the confines of its networks. The second is the network security bucket, which involves how a network is being infiltrated and used to cause some type of harm to one's own company or to others. While there are liability aspects to these and resulting third-party claims, a big chunk of the exposure is the expenses a business faces when an event happens, whether it is a data hacking event that requires forensics and notification costs, or whether it is ransomware with the investigation of that and issues of whether and how the business pays the ransom. It all stems from how everything is connected across the internet, which places everything at risk.
Q: What are some of the types of cover¬ ages under traditional lines of insurance, as well as stand –alone cyber policies, that are being impacted by cyber risks?
Cernak: Coverages have evolved from tech E&O, media liability and, ecommerce insurance. Now there is not only data breach coverage for the expenses of responding to and remediating a data breach, but also for the third party actions that can be brought as a result of a breach. There is also systems damage and restoration coverage that is of growing importance, to help businesses restore their systems or data that may have been corrupted or stolen as a result of a computer attack. A corollary to that on the third party side is actions being brought against businesses for transmitting malware, propagating a denial of service attack (even if the company is not aware that it is being used for that), or breaches of sensitive information held by a corporation.
Originally, larger organizations were more interested in purchasing cyber coverages as a stand-alone policy. Over time, however, it has migrated to smaller organizations that usually access this coverage through endorsements to traditional types of policies. Some coverages may not be as common on an endorsement basis as they are on a stand-alone cyber policy basis, such as fraudulent funds transfer-otherwise known as business email compromise (BEC)-or contingent business interruption, property, and media liability coverages. Part of the reason for this is that for a stand-alone cyber policy, the underwriting process allows one to really dive in and understand the risk.
The primary difference is that you're not going to find a lot of manuscripting or tailored coverages in the endorsement market. The endorsements are standard, with a short (or no) application, and often with prepackaged affordable coverages that can provide as little as $5,000 up to $1,000,000 of coverage. The majority of the coverages provided by endorsement also have services pre packaged in at pre-negotiated rates for breach response, forensic IT, legal, or extortion specialists. This makes cyber coverage by endorsement a pretty good vehicle for smaller entities, and entities often move up from cyber endorsements to cyber stand-alone coverage over time.
Q: What lines of insurance offer cyber coverage endorsements?
Couture: Cyber endorsements are offered on professional liability policies, and often pick up first party expense for a data breach, with the idea that the main policy may pick up some privacy liability protection if it arises out of professional services. That privacy liability coverage may be broad, but does not include everything, so there may be situations where the endorsement/policy combination may not address all cyber needs. For example, where a business is experiencing a privacy liability situation impacting employees or vendors, there may be no coverage under its traditional professional liability coverage even with a cyber endorsement.
Cernak: There is a movement toward more comprehensive endorsement packages. Early on, the insured would have to guess at what it needed, and a business would get an endorsement for data breach or for a first party computer attack. There is a growing trend for providing the most common cyber coverages under a single endorsement, at a capped annual aggregate. The good news is there is probably some coverage for other cyber incidents in these more comprehensive endorsements, than what the insured may have initially anticipated and as noted also provide services that provide a lot of value.
Q: How are the cyber exposures from smart products impacting the cyber market and interrelating with traditional lines of insurance, such as genera/liability, professional liability, product liability and product recall, even homeowners and auto insurance?
Simonson: When we think about all of the devices available now, whether it's a smart home device, autonomous vehicles, wearables, we see everything is interconnected. One of the things that is going to start coming more into play is attempts to attach liability to the manufacturers of these devices, and possibly even the distributers and sellers of the devices. Also, when a device at home doesn't behave the way it's supposed to, or when the device is hacked and it causes something like your HVAC or furnace to turn off while you are gone, and your pipes freeze and your house is damaged, what is the impact on the standard homeowners coverage?
In a commercial setting, what if a refrigeration system with medical samples for a clinical trial is shut off? What are the damages, policies and coverages impacted? There may even be recall of some of these devices and the components within them. The industry will face many challenges and legal tests in the coming years of trying to determine where the liability is, and which kind of policy is going to respond or not respond. It blends into traditional products liability, even with just a failure of security of the device, and leads to downstream impact. From the autonomous vehicle perspective, we hear discussions right now about who is responsible and whose insurer is going to pay if there is an accident. Currently, auto is heavily regulated and there is a no-fault system as well as a tort system. But when is an accident the fault of the human behavior of the driver or the autonomous vehicle, or the fault of another vehicle that is human driven? There's a lot that we need to think about when we look at insurance coverage for these accidents.
Couture: With regard to professional liability policies, typically those are designed for situations where a professional such as a lawyer or accountant provides inappropriate advice and does not contemplate injury that might arise out of disclosure of private or confidential information. But these policies tend to have broad definitions of"professional services"; and if there is an impact to the insured's client, there is a chance that the policy is going to be picking up the third party claim. However, it's not likely to pick up the first party response costs to a data breach, and that's where attorneys and other professionals really need to focus, because they may have legal obligations to respond to such a breach; and if they don't have coverage for it, they will be funding that themselves.
Q: Are there cyber events which trigger multiple policies, in different lines of insurance?
Simonson: Denial of service events can impact a property policy and a cyber policy. Each may have business interruption and contingent business interruption coverages, although they can also be very different in how the coverages are going to apply. For years we've seen the pressure on GL policies to cover data breaches. Now, as we see more business email compromise claims and social engineering claims that involve money transfer, we are seeing more pressure on traditional crime policies.
As purchasers are buying policies that have duplicate coverages, you're going to see interplay between the policies and associated pressures and challenges. The coordination of responses between multiple policies is even more challenging when they are issued by different carriers. The bigger challenge, however, is when someone is trying to find coverage where no coverage was ever intended, whether that's CGL or crime, because they didn't buy something else that would have responded.
Q: What is the "silent cyber" that has been talked about in the industry press recently, and how has it affected traditional lines of insurance?
Couture: "Silent cyber" refers to a policy that had no intention of covering a cyber-type exposure. In the CGL area, there is no intention to cover hacks, but the policy may be pulled into a situation and end up providing a defense. In a CGL policy, there is an ongoing discussion as to whether advertising and personal injury coverage would apply to a hack of personal information or whether a knowing or intentional act of the insured is required and present in a data breach. Then there is the effect of the insured not even being aware of the data security vulnerability at issue. The flip side of the argument is that there's no direct language requiring intentional conduct, so why wouldn't the policy cover something an insured should have protected? There is also an argument as to whether a hacking is the "publication" necessary for advertising and personal injury coverage. A hacker may have access to information, but is that really something that is a publication? Even if a policy has an appropriate exclusion in place today, there may be something new tomorrow that it doesn't address, and so one has to keep abreast of technology trends and be prepared for the next thing that's coming around.
Cernak: For CGL policies, there has been some exclusionary language produced by ISO, which did two things. One, it made it more difficult to make a claim under these policies. Two, it helped to elevate awareness that people should buy something that provides explicit cyber coverage rather than relying on silent coverage.
Simonson: Silent exposures render every insurer a cyber insurer, whether they think of themselves as one or not. The exposure that a business faces as a result of the internet or other cyber exposures are not limited to coverages that are found under a cyber policy. For example, there can be exposure to Workers' Compensation insurance from the growing number of wearable technology in the workplace, which may generate an uptick in Workers' Comp claims. So whether you issue a cyber policy or not, or whether you intended to cover it or not, you are already in the game.
Q: Are cyber events impacting D&O Insurance?
Couture: We've seen shareholders bring derivative lawsuits on behalf of the corporation when there is a data breach. Some allege breach of fiduciary duty, corporate waste, and failure to have the appropriate cybersecurity. There are also situations in which a data breach is announced causing the stock price drop and resulting in a laws it. This leads to scrutiny of the secunty in place at the time and an expectation that the corporation has taken steps to ensure protection of data. We have seen that having a plan and having some cybersecurity and attention to cybersecurity in place has protected many corporations, but not necessarily prevented them from facing a lawsuit. Moreover, the more government agenc1es that have cybersecurity requirements, the more compliance is a challenge.
Q: Is there an impact on homeowners' policies?
Cernak: There are a number of other exposures that present themselves in a home. For example, people may have data breach potential exposure if they volunteer for community activities and collect and maintain information about individuals. Connected devices may be subject to ransomware and extortion threats requiring a coverage response. Thermostats could be held for ransom and cause pipes to freeze, refrigerators could have their temperature be turned up causing spoilage, and connected locks can be opened remotely. In the eyes of a home insurer right now, it doesn't matter if you turn the heat down by walking over to the thermostat or if it is remotely turned down, or if a brick is thrown through a glass window or someone opens the front door remotely to steal your TV. There are also privacy issues, such as TVs and children's toys monitoring activities in the house. People are also using social media to get a sense of when you are home and when you are not, which could lead to increased theft. There is also a need for coverage for cyberbullying, both on the first-party side for resources and costs to help the insured victim of cyberbullying, as well as for cyberbullying liability when someone in the household is perpetrating the cyberbullying. Some of these events can have coverage under a homeowner policy event without explicit coverage, i.e., silent cyber. We haven't seen a great deal of activity yet to carve out those potential coverages from traditional homeowner's policies. There are a handful of homeowner insurers providing explicit cyber coverage on an endorsement basis. There is also some on-line fraud coverage available. These endorsements look similar to some of the cyber endorsements on commercial lines policies. As homes become more technologically advanced with increased computing power, there is going to be more need for coverage, as seen in commercial lines.
Similar to the commercial side, as people realize the potential exposures and associated lawsuits, you may see activity with insureds seeking coverage under homeowners' policies, and a resulting tightening up of the policy language with either affirmative coverage or affirmative exclusions.
Q: What about claims by one insurer against another, or between businesses (B2B), arising out of a cyber event? Are you seeing subrogation claims?
Couture: While we haven't seen a lot of claims between insurers so far, as first-party costs increase there is an expectation that insurers will consider subrogation, for example against vendors who were the conduit to a breached insured's network. Subrogation entails a cost-benefit of available insurance coverage or sufficient assets and whether there is an indemnification agreement. These claims will typically be either for negligence or breach of contract, so the insured will need to prove that the vendor failed to follow a standard of care. That can be a challenge, because not only do the risks and standards of care continue to evolve, but the insured may also be at fault. So if the vendor fails to, for example, update its software or maintain adequate encryption, that scenario may be enough to go against the vendor; but if the insured also fails to train employees on how to avoid a malware intrusion that was a contributing cause to the cyber event, that might be an issue in any subrogation or contribution claim.
Simonson: Nothing stops claims or suits from determining fault even absent subrogation. For example, I hire a vendor to provide a service, and they do something that causes a breach. I am the one that has to notify those affected and pay notification costs. Nothing stops me from bringing a claim against that vendor myself, apart from my insurer, and hope that they have professional liability coverage in place or the wherewithal to respond. If something happens, and there is breach litigation such as a consumer class action, both the business that breached and its vendor may be named as defendants.
Q: How are some of the traditional " provisions common to insurance policies playing out when applied to cyber risk claims?
Simonson: Contractual legality exclusions, which are in almost every policy in some form, are an issue. In the payment card industry, liability is assumed by merchants under a chain of agreements that includes a master services agreement with a card brand such as Visa or MasterCard, under which obligations and penalties for a data breach are established via contract. Also, a lot of companies such as vendors are agreeing to pay notification costs on their customer's behalf. So contractual liability exclusions may be problematic in certain situations.
Also, if you look at cyber coverages across the products in the market, you will see varying exclusions relative to internet or other infrastructure outage, failure to have the security protocols that were shown on your application, or failure to meet current security standards. Each carrier may have a different approach to what they consider to be a business risk they may not be interested in covering. So it's really important that purchasers of a coverage pay attention to these provisions.
Q: How are insurers coordinating their response to cyber–related claims noticed under various lines of insurance?
Couture: Typically, the cyber claim is the fastest moving of all. Whether the cyber team takes the lead will depend on the facts and lines of insurance available. Regardless of whether they take the lead, they should be helping to coordinate the overall breach response. Overall, the key components are communication, education, and business partnership to get the claim to the right team quickly and ensure engagement of the right resources. With regard to communication, there should be a recognized point of contact for cyber related matters and issues that everyone in the company should know, to which cyber-related questions and claims get routed. From an education perspective, . that includes claim professionals, intake personnel, and pretty much every employee. As we educate employees about basic cyber risks of insurers, it also helps improve the quality of service to the insureds as employees will understand what the risks are. Business partnerships are important, including working with brokers, agents, and insureds to understand the insured's insurance profile when there is a possible cyber incident that could impact multiple policies. Brokers can help when they are reporting a claim by identifying other policies and providing basic information at their disposal.
Simonson: Another challenge is that we can't always predict how the insured will report a claim. So it's important that the insurer recognize certain tag words to identify cyber claims from an insured, who is used to reporting slip and fall claims under a GL policy. How swiftly the insurer distinguishes the cyber claim and involves the cyber group prevents a delay in handling the claim and relieving angst internally and externally.
Cernak: Building on that, another thing an insurer can do is identify examples of types oflosses that could eventually turn into, but may not be initially, a cyber loss. For example, someone calls in and reports a claim for stolen computers as a property loss. They may not recognize that they may also have a data breach from personal information on the stolen computers that wasn't encrypted.
Q: What about aggregation of risk when a cyber risk falls under may different policies or impacts many insureds?
Cernak: The first step is acknowledging that the potential for aggregation of risk really does exist in cyber and is not as easily addressed as under other lines of business. For example, if you feel you have too much exposure to Atlantic hurricanes, you just stop writing on the Florida coast and start writing elsewhere. For cyber, you don't have that luxury; there is no place to hide from cyber exposure. We saw a small glimpse of what can happen last fall when a DNS provider was brought off-line for a bit. We have seen localized mini accumulation events where a service provider's clientele list was apparently breached and a vulnerability was discovered in how they set up systems, and the hacker targeted the entire clientele list with the same type of attack.
The struggle, though, is how do you know what an accumulation event will be if you haven't ever seen one? Data on that is limited and the data we are collecting today doesn't reflect the risk five or ten years from now.
We are seeing certain mechanisms that facilitate aggregation, such as denial of service attacks, which are going to become larger and more common. These attacks are going to use larger networks and more computing power and will be increasingly automated. When denial of service attacks are targeted at entities upon which a number of businesses rely, that's when you start to get some of that accumulation concern.
Couture: We have some ability to do claim coding to track what's coming in. The key to tracking accumulation is also communication with the different areas within the insurer's claims operation as well as actuary, underwriting, and risk control teams. Finally, one should stay abreast of technology and the areas it impacts. You need to have a commitment to continually educate yourself and those around you.
Cernak: People are starting to talk more and more about a common terminology and coding, but what do you do with that information once you have it? That's where people in the industry are still struggling.
Simonson: We need to develop tools that help us understand our potential aggregation exposure, but how do we do that? We can review our exposure limits and we can review the potential impact of a single event on our book of business, but there is still a lot more work to be done to capture the reality of the risk. We need to plan for the worst case scenario, and walk through "what if this happens, would this policy apply?"
Q: What about reinsurers, what challenges are they now facing?
Cernak: Many of the same challenges facing direct carriers also apply to reinsurers, just with a multiplier on it. A lot of the same issues of understanding what is actually being covered, and in how many places apply to reinsurance. A reinsurer can have accumulation vertically on a single risk, or horizontally across multiple risks. As there are ever larger towers of insurance being constructed, there are only so many reinsurers in the market assuming some of this cyber risk, and thus knowing which layer you are on and how many times you are being approached by different carriers on the same tower is key to assessing risk accumulation.
Q: What do you see as the challenges and cyber risks coming down the road that our current policies may need to face in the next year or so?
Simonson: The biggest challenge we are going to face is responding to the connectedness of everything. We may not realize the implications of "unlocking our doors remotely;' or the risks we are exposing ourselves to when we download a simple app. Who knew my smart TV was always listening? We need to watch the technology trends and anticipate what the risk to insurance companies may be. We hear much more about whether devices that are connected to the internet should be regulated and designed so they are secure, and whether . the companies are living up to the security promises they made, the basis for recent FTC investigations. Insureds and insurers that are used to dealing with manufacturing defects may have to deal with these issues, but it's really not the device that fails, but it is also doing something else that impacts people in a way they don't like. While regulations may be increasing, what does full compliance mean in this context? How do we comply with regulatory provisions such as those in the EU's General Data Protection Regulation effective next year that includes a right-to-be-forgotten provision? As regulations shift to protect privacy, there is a whole different type of compliance that a lot of companies in the United States, which aren't used to such provisions, are going to need to address.
Cernak: I think the whole concept of trust, and what and who you trust and how that can be exploited, is an area to focus on in the future. Trust is going to carry more value as things become more connected, and how does one know who to trust? Right now, a lot of the lawsuits relating to breaches are predicated on the promises made by companies to keep data safe and secure, as contained in privacy statements.
Couture: That's a good point, and it is especially timely now with all the devices listening in. Additionally, there is the question of which companies to trust to keep the information they collect safe and private and stored for a limited time.
Q: Last tips?
Cernak: Keep abreast of everything, and know your policy language and intent,
so you understand what you've written. Be paranoid.
Couture: Have a commitment to continuous education in cyber risks all around.
Simonson: Be involved in one of the numerous information sharing associations focused on cyber risks
Originally published in AIRROC Matters
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